The ‘Winner-Take-All’ Market And Our ‘Scroll Hypnosis’ Economy

With market concentration for the five largest names (Microsoft, Apple, Amazon, Google, and Facebook) now exceeding 20%, the S&P 500 arguably no longer represents corporate America, let alone the broader economy.

This is a topic that’s “top of mind” for investors right now, and it’s certainly been a fixture of the running dialogue in these pages.

Recapping first quarter earnings for corporate America, Goldman’s David Kostin underscores the point, noting that the S&P 500 “carries large earnings weights in non-cyclical industries, which posted positive EPS growth in 1Q and are expected to post much stronger full-year EPS growth relative to the broad index”. For example, Software & Services comprises 9% of S&P 500 EPS, led, naturally, by Microsoft.

“S&P 500 earnings are partially insulated relative to the economy given its large-cap tilt and high weight in non-cyclical industries”, Goldman goes on to say, adding that “concentration within the equity market has been growing [and] the ongoing crisis has exacerbated the ‘winner-take-all’ nature of the equity market, acutely affecting small companies with less operational and balance sheet flexibility than their larger peers”.

Given the composition of Comms Services, the following visual isn’t a “clean” read on the “top five” market concentration dynamic, but it helps you visualize the bifurcated nature of the market.

The character of the current crisis is such that it reinforced many existing trends, even as it forever altered the way we think about economic life. The post-COVID world is more conducive to e-commerce and the substitution of virtual interactions for the “real” thing.

As Nomura’s Charlie McElligott wrote last week, the mantra for investors and traders is “long the stuff that can grow without a hot cycle versus short economically sensitive names”.

It’s remarkable that big-cap tech (the Nasdaq 100) is gunning for new highs despite the outright collapse of the US economy.

Or maybe it isn’t – remarkable that is. As alluded to above, there’s a sense in which tech now is the US economy. Goldman drives that home with a series of eye-opening numbers.

After noting that Consumer Discretionary sales excluding Amazon dropped by 6% in the first quarter, the bank writes that “restrictions have expedited the shift to e-commerce and other online services”. Consider these figures:

• Online retailer Wayfair reported that gross revenues 2QTD have grown by 90% year/year,
• Target reported 275% growth in digital sales MTD through April 23
• Chipotle reported that, while in-store ordering plunged by 75%, delivery and order-ahead sales surged by 150% and 120%.
• Video chat apps (+1,255%), grocery apps (+134%) and ecommerce apps (+118%) have all more than doubled the number of downloads since last year

Obviously, those growth grates aren’t sustainable, but they may represent a durable shift in consumption habits.

Quite a few consumers tried grocery apps for the first time during the pandemic. Not everyone will have enjoyed the experience, but then again, pushing a cart around the grocery store isn’t exactly on par with Disneyland when it comes to experiential bliss either. It’s likely that at least some of the consumers who tried grocery delivery (or pickup) during the lockdowns will go to that option more often post-COVID. Amazon was already gunning to accelerate that trend, and they’re positioned to benefit from the shift.

This shift isn’t confined to grocery shopping, and adapting will require companies to alter the way they do business at any physical locations which remain open. Goldman gives you a concrete example. “In mid-April, Best Buy reported that it had retained 70% of sales by enhancing curbside pickup offerings despite all US stores being closed to customer traffic”, the bank writes.

Of course, you don’t need as many actual employees if all you’re doing is putting boxes (or grocery bags) in people’s trunks. Or if you do need the same number of employees, they won’t be making sales pitches or running checkout lines anymore. Instead, they will be “reprogrammed” to the equivalent of warehouse workers. How long, after that, do you imagine it’s going to be before at least some of those workers are replaced with robots who can do the same job? It’s not difficult to imagine a half-dozen smiling people with name tags positioned outside, on the curb, to help load your vehicle, while the entire store (big box, grocer, or whatever else) is staffed entirely by machines.

This is made all the more likely by potential litigation tied to COVID-19 spreading among human employees (and customers) once stores reopen, and also by any presumed margin hits tied to costly precautionary measures.

“Several brick-and-mortar companies have highlighted increased costs associated with coronavirus”, Goldman’s Kostin went on to write. “Target noted that costs were expected to be higher because of investments in pay and benefits as well as additional cleaning of stores and distribution centers”, he continued, before reminding investors that “even Amazon, a relative revenue beneficiary, guided for $4 billion of extra costs related to COVID-19, including worker safety measures, virus testing, and higher labor costs”.

I want to take this opportunity to redeploy, and expand on, some of the language I used to describe this situation a week ago.

When it comes to “the stuff that can grow” (to quote Nomura’s McElligott), you should note that it’s also the “stuff” that fascinates retail investors. And not necessarily because they understand the rationale behind owning secular growth during a downturn, or grasp the extent to which all of this is really just one trade on the “slow-flation” environment that’s persisted for years, and which has been prolonged by the coronavirus recession.

In addition to the macro-based investment thesis, widespread fascination with the top five stocks stems at least in part from the world’s childlike obsession with toys, gadgets and the apps that run on them.

“Scroll hypnosis” is a real thing. If you’re an investor and you want to “own what you know”, everyone “knows” these companies because, increasingly, they are synonymous with life in a way that something like Starbucks or Nike are not. It’s true that you “are what you eat” and that people still identify with brand names. But you are not a white chocolate mocha or a pair of VaporMax in the same way that you are your Instagram or your Twitter handle.

While the business models of the tech heavyweights aren’t immune to COVID-19, they have a stranglehold on all aspects of digital existence. These monopolies permeate nearly every facet of daily life. And for millions upon millions of Americans, digital life is the only kind of existence that’s possible right now.

I’ll punctuate this with one simple statistic.

In Q1, S&P 500 EPS dropped 14%. Earnings for the Russell 2000 fell 90%.